SHANGHAI (Reuters) – China stepped up policy measures on Monday to defend the weak yuan by easing rules to allow more borrowing abroad and sending verbal warnings as the Chinese currency hovered around 16-month lows against the strong dollar.
The yuan has faced renewed downward pressure, under the triple whammy of a broadly stronger dollar, lower Chinese yields, and rising trade tensions with other economies.
The People's Bank of China (PBOC) announced on Monday that borrowing limits will be lifted to allow companies to borrow more abroad.
The ratio under its macroprudential ratings – which sets the maximum a company can borrow relative to its net assets – will be raised to 1.75 from 1.5, with immediate effect.
The People's Bank of China said in a statement that the move aims to “further improve the macro-prudential management of cross-border financing, continue to increase the sources of cross-border funds for enterprises and financial institutions, and direct them to improve their asset liabilities.” A statement issued in conjunction with the Foreign Exchange Regulatory Authority.
Separately, the China Foreign Exchange Commission intends to keep the yuan's exchange rate basically stable at reasonable and balanced levels, the central bank said in another statement.
The committee is a forum under the auspices of the Central Bank and the Foreign Exchange Regulatory Authority.
The committee also said that monetary authorities will work to increase the flexibility of the foreign exchange market and strengthen market management. They will also correct pro-cyclical market activities, address behaviors that disrupt market orders and prevent exchange rate overshoot risks.
In Hong Kong, People's Bank of China Governor Pan Gongsheng told the Asian Financial Forum on the same day that “China has the confidence, conditions and ability to maintain the stable operation of the foreign exchange market.”
Ban reiterated that China will keep the yuan's exchange rate basically stable at reasonable and balanced levels.
These measures “send a signal to stabilize the yuan,” said Ken Cheung, chief Asian exchange market strategist at Bank Asia Pacific. Mizuho (NYSE:) Bank.
“But the actual impact on capital flows and the exchange rate is relatively limited, due to the low cost of domestic financing.”
Regulators will continue to use daily midpoint fixing mainly to stabilize the currency and guide market expectations, Cheung said.
The Chinese currency was trading at 7.3315 to the dollar by 0247 GMT on Monday, a price not far from the lowest level in 16 months of 7.3328 recorded on Friday. It has lost more than 3% against the dollar since US President-elect Donald Trump won the elections in November.
The central bank sets its official guidance for the midpoint on the firmer side at the key level of 7.2 and stronger than market expectations since mid-November. This is widely interpreted by traders and analysts as a sign of growing concern about the yuan's recent declines.
The People's Bank of China said last week that it would sell 60 billion yuan worth of six-month yuan bonds in Hong Kong on January 15, the largest number since the central bank began sales of such bills in the financial hub in 2018.
Selling these yuan bonds will absorb liquidity in the market to reduce speculative bets against the yuan.
